- Pyramid Holdings Limited (PHL) is a private storage solutions company based in Winnipeg, Manitoba. PHL's bookkeeper Joan Chen prepared a preliminary trial balance for the 2017 fiscal year but quit before finalizing it.
- The replacement bookkeeper is tasked with preparing adjusting entries, a draft statement of financial position, draft income statement, and summarizing the requirements for PHL to go public within the next few years.
- There are several accounting issues that need to be addressed based on notes from Joan and the company owner Jim before the auditor's arrival in one week.
1. ACC571_Final Project
Pyramid Holdings Limited
Contributed by Jeffrey Botham and Bruce J. McConomy
Lazaridis
School of Business & Economics, Wilfrid Laurier University
Pyramid Holdings Limited (PHL) is a private company based in
Winnipeg, Manitoba, that offers
storage solutions, such as shelving units and organizers, to a
variety of business clients. Joan
Chen has been the bookkeeper for PHL for several years, and
prepared a preliminary trial
balance for the fiscal year ended March 31, 2017 (Exhibit I).
The company chose a March year
end to coincide with its business cycle. The company’s owner,
James Steel, has been thinking of
taking the company public in three or four years and would like
to ensure the financial
statements are attractive to potential investors.
When Joan Chen presented Jim with the preliminary trial
balance for the 2017 fiscal year,
2. a number of things struck him as being not quite right. Joan is
not a CPA, so Jim prepared a list
of items for follow-up with the auditor to make sure they are
dealt with correctly (Exhibit II).
During a heated discussion with Joan about several of the
contentious issues on the list, Joan
walked out of the meeting and quit before preparing PHL’s final
trial balance and financial
statements.
You are the replacement bookkeeper assigned by the ABC temp
agency to help PHL
prepare financial information for the auditor. You are currently
completing your business degree
in the evenings, and hope to write your CPA examinations in a
year or two. The auditor will be
arriving in a week. Jim offered to hire you as a full-time
replacement, once your two-week
assignment as a temporary bookkeeper is up, as long as you can
“make the numbers look good”
for him and the company. He indicated that he expects that
when the company goes public, he
will be able to pay you a $6,000 bonus “if you can get the job
done right.” By coincidence,
$6,000 is the exact amount you owe for your student loan, so it
3. would come in quite handy!
You were able to call Joan, who provided you with some
additional information (also in
Exhibit II) be fore she left on a six-month trip to “parts
unknown” where clearly, she does not
want to be contacted again.
Required
PHL follows ASPE, and Jim has instructed you (and the
auditors) to use the simplest methods
allowed for PHL’s financial statements. (Note: round all
calculations to the nearest dollar.)
(a) Prepare all adjusting entries required for the March 31,
2017, financial statements and
also include them in an adjusted trial balance work sheet.
(b) Jim would also like you to prepare a draft statement of
financial position and draft
income statement for discussion with the auditor. For purposes
of calculating tax expense for the
draft financial statements, you can do what Joan has done in
prior years: ignore the impact of any
4. timing differences and assume that accounting income equals
taxable income. (The auditors will
provide a more specific estimate in a few weeks.)
(c) Jim is also hoping that you can briefly summarize the
requirements of “going public”
for him, so that he will be prepared to discuss this with the
auditors. (He specifically said you do
not have to “run the numbers” for going public, he just wants to
have an overview of the
requirements of going public, including whether it will have any
impact on PHL’s accounting
policies.) There is no need to do an extensive report on the
impact of going public in a few years,
because Jim is relying on the auditors to provide that analysis
separately next year.
Exhibit I- Financial Statements
Joan’s Notes (see also Exhibit II)
» Remember to ask auditor about the shareholder loan and
repayment.
5. » Professional fees for audit and going public?
» What to accrue for payroll that will be paid covering March
28 – April 8, 2017, for $10,000? (The $10,000 covers
all employees, and the standard work week is Monday–Friday,
with paydays occur ring every second Friday.)
EXHIBIT II – ITEMS FOR FOLLOW-UP WITH AUDITOR
The following is a list of items for follow-up with the auditor
compiled by Jim. It includes
information pro vided by Joan to you.
» PHL purchased a used delivery truck for $10,000 on July 1,
2016, and it was expensed as part
of Vehicle Expenses.
» The lease payments for the company car, used mainly by the
VP of sales for visiting clients,
are in correctly recorded under Vehicles—Leased. The monthly
payments are $400 and began on
May 1, 2016, for a three-year lease. (Note: only the first 10
months of payments had been made
by March 31, 2017.) If PHL had purchased the car, it would
have cost $30,000. The car has an
6. expected useful life of six years.
» The company’s heat, electric, water, and related utility bills
had not been received when Joan
pre pared the financial statements, so she accrued a total amount
of $1,000 for the three bills in
the trial balance. When the final invoices arrived, the cost
actually totaled $2,500, due to an
extremely cold winter and repairs needed to a frozen water pipe.
In addition, there was $10,000
damage (to carpets and so on) due to the flooding caused by the
frozen pipe. Joan did not record
the $10,000 amount disbursed because it should be covered by
the company’s insurance policy.
There is an $800 deductible on the insurance claim that remains
outstanding and will be
deducted from the reimbursement from the insurance company.
» ATL Bank had loaned the company $20,000 during the first
week of the 2016–17 fiscal year,
and the company made a payment of $5,000 to the bank on
November 1, 2016. Joan admitted
she had not recorded the payment, and was going to speak with
the auditor about it when they
came in for the year-end audit. The bank charges 6% interest on
7. the loan, but Joan did not record
any interest because she did not consider it material. ATL
charges its usual prime plus 1% (that
is, 6%) on the loan, with the interest due on the anniversary
date each year. The $20,000 amount
is included on the trial balance in Accounts Payable.
» The audit fee was estimated at $25,000. However, the audit
firm has indicated that it will
charge an additional $20,000 to help prepare an initial
consulting report regarding factors to
consider when Jim eventually takes the company public. The
audit firm estimates that the
consulting report and related work was “90% complete” on
March 31, 2017. Neither of these
items have been recorded in the trial balance.
» A shipment of inventory valued at $1,500 was shipped by a
supplier on March 28, 2017,
scheduled to arrive at PHL on March 30, 2017, but it arrived on
April 3, 2017. It was delayed
because it was shipped by truck and got caught in a snowstorm.
The shipment was FOB shipping
point. Joan re cords shipments based on the arrival date at the
8. company’s warehouse and
therefore no entry had been made to include the inventory. Of
course it was also not included in
the physical count that took place on March 31, 2017, as it was
not present for warehouse
personnel to count.
» The company has not performed a detailed analysis of its
allowance for doubtful accounts
since the auditors were in last year; it was $5,600 at March 31,
2016 (before any accounts
receivable were writ ten off during the 2016–17 fiscal year).
Joan booked a preliminary estimate
of $3,600 of bad debts for fiscal 2016–17, because she did not
know how the amount recorded in
2015–16 was calculated. Joan knows that the auditors like to see
an aged accounts receivable
schedule on the first day of their audit, so she has prepared one
(Exhibit III).
» Joan took a week off between March 24 and March 31, and the
invoices for new office
furniture purchases that came in during that period totaled
$15,000 and were recorded in
inventory by her assistant. The office furniture had arrived at
PHL on March 1, 2017, and is
9. expected to last 10 years.
» Joan and her assistant attended the inventory count at the
main warehouse. Similar to March
31, 2016, the owner assured her that there was “$50,000 of good
inventory” at Warehouse #2, a
ware house in Brandon, Manitoba, that is rented from the owner
(Jim’s father) at a cost of $2,000
per month. Joan never verified the existence of the inventory,
nor had she (or the auditors) even
been to the warehouse. The cost of the goods purchased was
“paid for” by the note payable that
appears on the trial balance. The note is non–interest-bearing,
so Jim says he is in no hurry to pay
it. The $50,000 of inventory was originally purchased on
December 31, 2014, according to Jim.
» PHL uses straight-line depreciation for all of its property,
plant, and equipment other than
vehicles (where double declining-balance depreciation is used).
Aside from the items discussed
above, there were no additions or disposals during the year.
Property, plant, and equipment items
are estimated to last for 10 years, and vehicles for five years.
Joan had not recorded any
10. depreciation expense for the 2016–17 year before she quit.
However, depreciation charges prior
to 2016–17 have been audited and were done correctly.
» Jim had arranged a special deal with one of his best customers
(BCL) on October 1, 2016. The
deal allowed the customer to purchase $22,000 (cost) of
inventory for a price of $35,000. The
“special” part of the deal was that BCL would not have to make
any payments on the $35,000
outstanding amount for the goods until October 1, 2020. In
addition, BCL would only be charged
2% interest on the amount outstanding to be paid each year on
October 1. BCL was quite pleased
with this deal because it has a bit of a cash flow problem, so
BCL’s bank charges it prime plus
3% (8% annually) instead of the 6% charged to PHL. Joan
recorded the sale of $35,000 and the
cost of goods sold of $22,000 in October 2016, but was unsure
if other entries were needed.
» PHL pays tax at a 25% tax rate, and Joan had told Jim that
based on her discussions with the
auditors, “once again there are no permanent differences, so
under ASPE taxes are pretty simple
11. to calculate.” Joan left before estimating the tax expense for
fiscal 2016–17. However, she sent a
cheque to the Canada Revenue Agency for $20,000 on March
15, 2017, because that was the tax
expense from fiscal 2015–16, and so it was her best guess as to
how much PHL will owe in taxes
for fiscal 2016–17. However, she did not record the $20,000
payment before she left.
» When Joan provided Jim with the preliminary trial balance
(Exhibit I), she included a few
questions for the auditors at the bottom of the trial balance. You
hope to be able to impress Jim
by also dealing with these questions before the auditors arrive!